Interest rates on savings accounts are currently disappointing. Even the best tax-free ISA will only yield a few percent interest, and getting the best rates requires tying up your money for several years. However, there are a few alternative ways to make the most of your extra cash. Some of the best alternatives to sticking money in a low-interest savings account include:
Investments are becoming increasingly popular, as many seem to promise much better returns than you would get from even the best savings account. There are several types of investment you may consider. Property is popular, but will likely require a large outlay. You can venture into stocks and shares with much more modest funds, and these can be placed into an investment ISA for tax-free returns. Peer-to-peer lending is also growing popular, and will soon also qualify for tax-free status through ISAs.
However, it is absolutely vital to understand the drawbacks and risks of any investment before placing money into it. In return for higher returns, investments carry risks and you may lose money. The stock market, in particular, can seem attractive but is highly volatile. A wrong move can prove costly.
Paying off extra on your mortgage will usually yield better results than placing money into a savings account. Think of your finances as a ledger. The money you have is balanced against any money you owe, including your mortgage. Your funds grow as they earn interest, and your debts do the same. As a mortgage (and most other forms of borrowing) will usually have a higher interest rate than any savings account, using a given sum of money to reduce your debt and the interest it accrues will usually push the balance in your favour more significantly than if placed in a savings account. In the long run, you will repay less and end up better off.
The obvious drawback here, however, is that your money is lost. If you need access to your funds in cash, money in a savings account can be withdrawn. Investments can be sold to regain your original funds and hopefully more besides. However, while money used to pay off a mortgage will leave you better off in the long run, you will lose access to your money completely in the short and possibly even medium term. You should therefore not put all of your spare money or savings towards a mortgage, but rather keep back enough cash to ensure your finances remain stable.